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Banking Crises

Banking Crises. Fin254f: Spring 2010 Lecture notes 2.2a Readings: Reinhart and Rogoff(10). Outline. Bank run theory Location and frequency of runs Crises and financial liberalization Capital flow “bonanzas” Comovements Equity prices Real estate Capacity Consequences.

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Banking Crises

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  1. Banking Crises Fin254f: Spring 2010 Lecture notes 2.2a Readings: Reinhart and Rogoff(10)

  2. Outline • Bank run theory • Location and frequency of runs • Crises and financial liberalization • Capital flow “bonanzas” • Comovements • Equity prices • Real estate • Capacity • Consequences

  3. Types of Banking Crises • Repressed financial systems • Bank runs

  4. Repressed Financial Systems(Emerging markets) • Developing countries • Government controls most banking • Force consumers to save at banks • Force banks to buy government debt • Government defaults • Wipes out depositors

  5. Bank Runs(Anywhere) • What is a bank? • Bank • Borrows short term (deposits) • Lends long term (assets/loan portfolio) • Investment banks, Shadow banking, hedge funds …

  6. Classic Bank Run • Depositors lose confidence • Withdraw funds • Banks forced to sell assets (loan portfolio) • “Fire sale”/distressed/low prices • Bank can run out of assets and go bankrupt

  7. Two Cases • Insolvent bank • Bank was bankrupt anyway • Liabilities>Assets • Solvent bank • “liquidity crises” • Can’t cover short term debt, but basically has good loans (assets) • Can still be shut down • Bad economic disruption • Which one is difficult to tell

  8. One Last Question • What is a bank?

  9. Policies to Stop Runs • Deposit insurance • Larger banks bailout smaller ones • Clever temporary mergers • Direct government assistance

  10. Banks and Recessions • Pretty strong connections • Bernanke, 1930s • 1/2 of all US banks fail • Credit constrained models, or credit channel models of business cycles

  11. Outline • Bank run theory • Location and frequency of runs • Crises and financial liberalization • Capital flow “bonanzas” • Comovements • Equity prices • Real estate • Capacity • Consequences

  12. Fraction of Time in Banking Crisis (Independence(or 1800) -> 2008) • Tables 10.1 and 10.2 • Developing • Kenya 19.6%,Nigeria 10.2, Zambia 2.2, Argentina 8.8, Russia 1.0 Mexico 9.7, China 9.1, Japan, 8.1, Singapore, 2.3, India 8.6 • Developed • France 11.5, Netherlands 1.9, Germany 6.6, UK 9.2, Canada 8.5, US 13

  13. Frequency of Banking Crises • Developing • Nigeria 1, China 10, India 6, Egypt 3, Japan 8, Singapore 1, Argentina 9, Brazil 11, Chile 7, Mexico 7 • Developed • Germany 8, Greece 2, UK 12, France 15, US 13, Canada 8, New Zealand 1

  14. Summary • Both developed and developing countries • All regions

  15. Crises and Liberalization • Figure 10.1 • Obstfeld-Taylor index of capital mobility • Arbitrary guess at global capital status • 3 year moving average of countries with banking crises • Banking crises probabilities higher after financial liberalization

  16. Capital Flows and Banking Crises • Sustained capital inflow • “Capital Bonanza” • Three year inflows before crisis • Cutoff at 20 percentile (for each country) • Over threshold then Bonanza

  17. Banking Crises and Bonanza’s • Table 10.7 • Prob(Crises) = 0.132 • Prob(Crises | Bonanza) = 0.184 • Share of countries where conditional prob is greater than unconditional = 0.609

  18. Outline • Bank run theory • Location and frequency of runs • Crises and financial liberalization • Capital flow “bonanzas” • Comovements • Equity prices • Real estate • Capacity • Consequences

  19. Comovements: House Prices and Bank Crises • Table 10.8 • House price cycles coincide with banking crisis years • Magnitudes in price declines similar between developed and developing countries

  20. Comovements:Equity Prices and Bank Crises • Figure 10.2 • Peak in year t-1 • Recovery started by t+2, nearly full recovery by t+3 • Much shorter than real estate • Two recent examples of “no crisis” stock market movements • Crash of 87 • IT bubble in 2001

  21. Comovements:Equity Prices and Bank Crises • Figure 10.3: Number of banks around great depression • 1976-1985: US Financial/GDP = 4.9% • 1996-2005: US Financial/GDP = 7.5%

  22. Outline • Bank run theory • Location and frequency of runs • Crises and financial liberalization • Capital flow “bonanzas” • Comovements • Equity prices • Real estate • Capacity • Consequences

  23. Bailout Costs • Difficult to measure • See table 10.9 • Argentina (High 55, Low 4 ) % of GDP • Some types of bailouts payoff eventually • GDP growth • Figure 10.4 • Central government revenue • Figure 10.6, 10.8

  24. Government Debt • Government debt levels, fig 10.10 • Increase in Debt (100 = start) • Average 3 year increase to 186.3 • Ignores state level debt

  25. Summary • Crisis are not limited to • The past • Emerging markets • Pretty common • Patterns similar

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